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Deeper Dive—Three big questions after AT&T’s HBO Max reveal

HBO Max is launching in 2020 and taking "Friends" along for the ride. (HBO/WarnerMedia)

WarnerMedia has been slowly spilling beans for months about its upcoming streaming service but this week saw the biggest reveal yet: it’s called HBO Max and it will have a whole lot of content.

HBO Max is scheduled to launch commercially in spring of 2020 and is anticipated to premiere with 10,000 hours of premium content. The service will include HBO content alongside originals and programming from Warner Bros., New Line, DC Entertainment, CNN, TNT, TBS, truTV, The CW, Turner Classic Movies, Cartoon Network, Adult Swim, Crunchyroll, Rooster Teeth and Looney Tunes. The service will also have “The Fresh Prince of Bel-Air” and “Friends,” exclusively.

The announcement – which didn’t come close to matching the stock-boosting pizazz of the Disney+ reveal, or even the lackluster Apple TV+ event – was packed into a press release loaded with quotes from celebrities. There were lots of hints about projects to come from Lena Dunham, Nicole Kidman and George R.R. Martin, but also tons of questions about the service.

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WarnerMedia didn’t include a price tag with this week’s HBO Max name drop. But previous reports suggested that the service will cost between $15 and $18 per month. Given that HBO already costs $15 per month, it would stand to reason that HBO Max – which throws in a lot of extra content and originals on top of HBO’s lineup – would cost extra.

Another few dollars a month might make sense for consumers who already subscribe to HBO but at $18 per month, the service would be priced substantially higher than Netflix (between $9 and $15 per month), Hulu ($6 per month), Amazon Prime Video ($9 per month, or included with $12-per-month Prime membership) or the upcoming Disney+ ($7 per month).

The head-to-head matchups on price aren’t in HBO Max’s favor but AT&T may have to aim high if it wants the service to make money (or at least cover forgone revenue).

Does it make financial sense for AT&T?

WarnerMedia pulled an NBCUniversal on Netflix and took back an extremely piece of licensed content, “Friends.” But the cost may have painted AT&T into a corner. After Netflix reportedly paid $80 million to keep “Friends” on its platform through 2019, AT&T swooped in and spent $85 million per year for five years to take the beloved sitcom back in 2020. BTIG analyst Rich Greenfield broke down how the annual cost, while it doesn’t appear dramatically higher, it might not make much sense for HBO Max.

lets assume #HBOMax can convert 50% of its HBO US sub base in year one (no easy task, but only an extra $1 or so per month) it would have ~19 million subs, which implies Friends cost 37c/sub/month ($425/5/19/12)

Greenfield expanded on those thoughts in a research note, which said that the primary function of HBO Max is to minimize churn levels for HBO Now, the company’s direct-to-consumer product that lets consumers easily cancel at any time. But even if HBO gets about 50% of its domestic subscriber base to upgrade to Max, the incremental revenue might not be very impactful.

“Getting an extra dollar from 20 million subscribers, even if you keep them for the entire year, only generates an incremental $240 million in revenue, which does not even come close to covering the incremental cost WarnerMedia is investing in HBO Max vs. legacy HBO (Friends alone is $85 million a year),” Greenfield wrote.

BTIG predicted that HBO Max will spend an incremental $1 billion or more on new production and library content to drive a substantial of non-legacy HBO subscribers to the platform and/or to meaningfully reduce churn.

“We suspect the latter will be the biggest near-term opportunity,” Greenfield wrote.

AT&T has hinted at a less expensive, ad-supported version its streaming service arriving at some point. Given the company’s vast amounts of direct customer relationships that can be used to target advertising and command higher CPMs, that could be a meaningful revenue generator for WarnerMedia. But that remains to be seen. For now, AT&T may have to settle for the fact that it dealt another licensed IP blow to Netflix.

How does this all affect Netflix?

The loss of “Friends” surely wasn’t unexpected for Netflix but, dang, it still has to hurt. The service seemed to take it in stride but responded with a far more somber tone than after losing “The Office.”

The One Where We Have To Say Goodbye.

We’re sorry to see Friends go to Warner's streaming service at the beginning of 2020 (in The US). Thanks for the memories, gang ☕

Now Netflix has lost its Disney library content and the two most popular shows on its platform. It’s all more fodder to doomsday takes. But Netflix will likely be OK – particularly after getting to reinvest all the money it’s no longer shelling out for Disney, “Friends” and “The Office.”

Netflix has become a household name and pushed an astonishing amount of shows, films and characters into the public lexicon. For proof, just check out this excellent illustration accompanying this recent story in the New York Times. So many of the faces on Netflix’s boat are instantly recognizable. The same can’t be said for Prime Video or Hulu.